This letter is in response to your June 16 request from public stakeholders for “ideas, proposals, and feedback on how to improve the American tax system.” We appreciate both the considerable thoughtfulness and energy you are putting into this tax reform effort, and the opportunity to share our views on important issues surrounding this initiative.

We write to voice our opposition to any proposals that would eliminate a vital element of our existing tax system that greatly benefits American agriculture, and by extension, rural communities: access to cash basis accounting. In 2013, certain leaders on both House Ways and Means Committee and Senate Finance Committee proposed legislation that would have required farming operations and other businesses with annual gross receipts of greater than $10 million (averaged over a three-year period) to use accrual basis accounting when determining their tax obligations. Farmers for Tax Fairness (FTF)1 was established in the fall of that year by concerned members of the agricultural community in opposition to these proposals.

For a host of reasons, FTF strongly supports preserving the tax code’s existing access to cash accounting for all agricultural businesses. Mandating a switch to accrual basis accounting would inflict significant financial harm on many of these operations and deny them the flexibility they need to succeed going forward.

For one, unlike many other impacted industries, farmers and livestock producers face very high input costs and wide swings in commodity prices, production, and income, meaning significant gross receipts frequently do not correlate to high overall operational profitability and an ability to pay higher taxes.

Such a change also would likely require affected producers to pay income tax on all deferred cash receipts they are carrying currently and would also restrict their ability to manage future risk by pre-purchasing inputs such as seed, fertilizer, or feed.

Moreover, agriculture producers’ margins are often vanishingly small. Where other industries and professional service firms often enjoy margins of 30 or 40 percent or more, agriculture typically has profit margins below 20 percent, and in many operations margins may average in the low single-digits, with some years profitable and some not. As a result, many agricultural operations survive on very modest profits despite experiencing significant gross sales.

Operations with high throughput and input costs would be particularly hard hit. For example, under this proposal, cash basis accounting would no longer be available to a:

Cattle feeder that markets 6,000 head per year. Assuming out weight of 1,300 pounds and a sales price of $1.26 per cwt.

Feed yard that maintains approximately 8,000 head on feed, assuming sales per head day of $3.40.

Beyond these few examples, this change has the potential to severely impact many diverse sectors of agriculture, including horticulture, egg production, fresh fruits and vegetables, orchard crops, and other similar segments of the industry.

Additionally, because agricultural producers endure significant price and production volatility from year to year, they rely on cash accounting to balance out that volatility and create more consistent cash flows and tax liabilities. To illustrate, USDA is estimating that net farm income in 2017 will see its fourth consecutive annual decline, and be approximately half of what it was in 2013. In these periods of low commodity prices access to cash accounting can preserve precious working capital that may be the difference between the operation surviving and failing.

Finally, aggregation rules could sweep many farm operations with less than $10 million in gross receipts into this prohibition. The 2013 proposals would have aggregated smaller operations with more than 50 percent common ownership, meaning that even businesses with less than $10 million in annual gross receipts could be affected if its owners also own other businesses. The rules pool businesses with related ownership together for the purposes of determining gross receipts, and if multiple related businesses total $10 million, each business would be required to use accrual accounting.

We are pleased that neither the Blueprint released by Republican leadership in the House of Representatives last June (“A Better Way – Our Vision for A Confident America,” June 24, 2016) nor President Donald Trump’s recent tax reform outline (“2017 Tax Reform for Economic Growth and American Jobs,” April 27, 2017) voice any support for this cash-to-accrual mandate for agriculture. That said, we understand the pressures facing your committee to offset the significant rate reductions envisioned by tax reform proponents, and we are concerned that tax writers may feel pressure to reanimate this concept as the package evolves and solidifies.

FTF has broad, national grassroots support for preserving cash accounting in agriculture and we are seeking your support in opposing any efforts to insert such a provision into the tax code in the tax reform process. Thank you again for your good work, for the opportunity to share our views, and for your consideration of this request.

(April 5, 2017) –Congress is weighing significant changes to the way farmers and agribusinesses are taxed, which could have a profound impact on how they do business. With tax reform holding opportunities and risks for U.S. agriculture in the balance, K·Coe Isom’s Doug Claussen, CPA, traveled to Washington, D.C., to provide testimony to the House Committee on Agriculture.

“Tax reform has broad implications across all areas of U.S. agriculture,” Claussen said. “We were honored to be invited to speak to the interests of producers and agribusinesses who strive to raise food and families profitably while adjusting to potential changes in the tax code.”

In the U.S. House of Representatives, legislation will be based on the Tax Reform Blueprint released by Speaker Ryan in June of 2016. The Blueprint proposes to lower and flatten corporate and individual rates, create a new business tax rate for pass-through entities, and repeal the estate tax. It also allows for immediate expensing of qual­ified purchases and capital expenditures (excluding land), but would limit the ability to carry forward net operating losses, eliminate the ability to carry back net operating losses, and limit deduction of interest expenses.

Among the many agriculture and tax reform topics touched on in the public hearing, Mr. Claussen made a point to the committee that forecast for farming net income in 2016 is half of what it was in 2013. And that adding the ability to carry back operating losses for five years, as opposed to the current two years, is critical to helping farmers deal with the volatility of the markets.

About K·Coe Isom

K·Coe Isom leads, nationally, as consultants and CPAs in the food and agriculture industry—services constituting more than two-thirds of the firm’s business. The firm is embedded throughout the US food-supply chain—from policy to plate—working with producers, input suppliers, processors, packagers, distributors, biofuel manufacturers, equipment dealerships, landowners, lenders, and many agencies and policy organizations that support the industry. The firm also has regional strengths in community banking, construction and real estate development, transportation, education, healthcare, manufacturing, and technology. K·Coe Isom serves domestic and international clientele from 19 coast-to-coast offices.

We are writing today to express our strong opposition to any tax reform proposals that would limit the ability of agricultural businesses to use the cash method of accounting. Cash accounting is critical to the management of agricultural businesses facing high volatility of commodity prices and input costs.

Farmers for Tax Fairness is a nationwide coalition of farmers, agricultural businesses, and agricultural organizations (www.FairFarmTax.com). We are committed to ensuring that Congress maintains the flexibility in the tax code necessary for farmers to manage their businesses during periods of high commodity and input price volatility. As you prepare legislation to effect comprehensive reform of the tax code, we urge you to not restrict the ability of agricultural businesses to use the cash method of accounting.

Discussion Draft Restricts the Use of Cash Accounting by U.S. Agriculture

On March 12, 2013, the U.S. House of Representatives Committee on Ways and Means issued a discussion draft of provisions to reform the taxation of small businesses. Section 212 of the discussion draft proposed limitations on the use of the cash method of accounting for farmers with gross receipts of more than $10 million. This section would affect farming operations structured as partnerships and as S-corporations. Section 213 of the discussion draft proposed to repeal certain requirements for the use of accrual accounting by C-corporations and to increase the number of family corporations that would be required to use the accrual method of accounting.

When this discussion draft was released, farmers across America objected to the proposal that would seriously impact cash flows and limit their ability to respond to price volatility. In response to this proposal, Farmers for Tax Fairness commissioned a national economic study that revealed that the proposal would remove almost $12.1 billion in equity and borrowing ability from U.S. agriculture. The ripple effects of this impact would be felt far and wide—with some agricultural operations forced out of business and others forced to put off purchasing necessary equipment and inputs. In response to the national opposition against this proposal, Representative Camp, the Chair of the House Ways and Means Committee exempted farming businesses from this proposed change when he introduced the Tax Reform Act of 2014.

Expected Impact on U.S. Agriculture

There are many reasons why Congress should preserve the ability of agricultural businesses to use cash accounting. The cash method of accounting presents simpler recordkeeping for most farmers and provides agricultural operators with significant flexibility to manage their farming operations consistent with their cash flow. By contrast, under accrual accounting, a farmer could incur a significant tax liability even though they have not yet received payment for a product.

As you know, commodity and input price volatility may dramatically affect the profitability of farming and other agricultural operations from year to year. Cash accounting methods allow operations to compensate for price volatility and create greater financial stability for their businesses. Because of this, the vast majority of agricultural businesses use a cash method of accounting.

Many of the farms and ranches that would be affected by this change are third-generation family operations being run by a parent and child or by siblings whose parents or grandparents founded the business. Many of these family operations support dozens of employees but run at very thin margins and with very low net income.

The combination of historically thin margins, rising costs of production, and price volatility can dramatically impact the gross receipts that an entity engaged in farming may have from year to year and may not reflect the actual income or loss reported by the entity. As a result, if Congress were to establish a gross-receipts threshold for the use of cash accounting, an entity may be pushed into the accrual method of accounting because of a year or two of unusually high prices. Note that for an operation such as a feedlot, there is no correlation between an increase in gross receipts from high corn prices and an increase in profits. To the contrary, in a time of rising commodity prices, an increase in gross receipts could narrow margins and reduce profitability.

Under a cash-basis system, a farmer can sell products or pay for inputs based on their cash flow. This cash flow is then reflected in the income or loss that they report. Under the accrual method, income or losses are not related to the actual cash flow of the farmer and may vary dramatically. If farmers are required to use the accrual method, significantly more time and costs will be expended on record keeping and filing claims to carry operating losses back or forward.

The profit margin in agriculture is not large enough to be subject to a gross receipts test. Where other industries may experience a 40% to 50% gross margin to cover operating costs, agriculture usually has gross profit margins under 20% and, in many operations, typical margins may be just 4% to 5%. As a result, many agricultural operations have significant gross sales to generate a modest profit.

A final point that should be noted in this discussion is that increasing the use of accrual accounting in agriculture may actually lead to increased tax complexity rather than simplification. Under an accrual method of accounting, farming operations will increasingly be forced to file amended returns to offset gains from prior years with losses incurred in subsequent years. This constant refiling of tax returns is mitigated to a considerable degree by the use of cash accounting.

Conclusion

We are pleased that the tax blueprint released by the House Ways and Means Committee on June 24, 2016 does not propose to limit the use of cash accounting by agricultural businesses. Nonetheless, we remain very concerned that Congress will seek to raise revenue to support rate reductions by restricting cash accounting. Please know that we are strongly opposed to such proposals and the negative impact they would have on agricultural businesses.
On behalf of the thousands of farmers and agricultural businesses represented by Farmers for Tax Fairness, we appreciate your consideration of this important matter.

]]>http://fairfarmtax.com/u-s-house-committee-on-ways-and-means/feed/0http://fairfarmtax.com/u-s-house-committee-on-ways-and-means/Comprehensive Tax Reform Opportunities & Risks for U.S. Agriculturehttp://feedproxy.google.com/~r/FarmersForTaxFairnessInTheNews/~3/dyF1fU_MDqs/
http://fairfarmtax.com/comprehensive-tax-reform-opportunities-risks-for-u-s-agriculture/#respondFri, 13 Jan 2017 17:41:27 +0000http://fairfarmtax.com/?p=475Read More]]>One of the top priorities for Congress will be comprehensive reform of the tax code.

One of the top priorities for Congress in 2017 and 2018 will be comprehensive reform of the tax code.

The food and agriculture industries will need to carefully analyze these sweeping proposals and work hard to ensure that the rewrite of the tax code strengthens and does not disadvantage U.S. agriculture.

We expect the U.S. House Ways and Means Committee will introduce its tax reform bill as early as the first quarter of 2017. The Senate Finance Committee will likely take longer to craft and introduce legislation and is more likely to move forward in a bipartisan fashion. While the House and the White House will strive to pass legislation during 2017, we expect that comprehensive tax reform is more likely to become law in 2018 prior to the mid-term elections.

Republican Tax Reform Blueprint

In the U.S. House of Representatives, legislation will be based on the Tax Reform Blueprint released by Speaker Ryan in June 2016. You can download a copy of the Blueprint here.

The Blueprint proposes to lower and flatten corporate and individual rates, create a new business tax rate for pass-through entities, and repeal the estate tax. It also allows for immediate expensing of qualified purchases and capital expenditures (excluding land), but would limit the ability to carry forward net operating losses, eliminate the ability to carry back net operating losses, and limit deduction of interest expenses.

One of the most significant changes proposed by the Blueprint is to incorporate “border adjustability” into the tax code. Under border adjustability, revenue accruing to a company from U.S. exports is not treated as income. Conversely, companies selling imports into the U.S. will pay income tax on such revenue. Further, the cost to U.S. companies of imported goods, such as fertilizer or farm equipment, would likely not be deductible as business expenses.

While some elements of the Blueprint could benefit agriculture, given the complexity and sweeping nature of the proposed changes, a detailed analysis based on actual legislative language will be necessary to determine how tax reform will impact the food and agriculture industries.

Key Questions

As Congress debates tax reform, some key questions include:

Would border adjustability strengthen the U.S. dollar, lead to retaliatory tariffs or otherwise weaken the competitiveness of agricultural exports?

Would agricultural producers be able to take advantage of border adjustability if they sell to domestic processors?

How much would immediate expensing of qualified purchases help agricultural operations if loss carry-forwards and carry-backs and interest deductions are limited?

What will be the effect on pass-through entities of establishing a new business tax rate?

Will Congress limit the ability of agricultural operations to use cash accounting?

How K·Coe Isom Can Help

At K·Coe Isom, we are working closely with key members of Congress to make sure that tax reform strengthens America’s agricultural economy. If cash accounting is important to you, please ask us about Farmers for Tax Fairness (www.FairFarmTax.org) and how you can join this effort.

Beyond cash accounting, if you run a significant agricultural business or are part of an agricultural trade association, there are multiple ways we can help you prepare for tax reform. Click the link below to learn more and request a consultation with a K·Coe Isom advisor.

Question: It seems like our business structures have gotten out of hand with too many entities. What should we do?

Answer: Many times there are serious gaps in the way the entities are transacting business with each other. So, it’s not necessary to throw away the entire business structure, but rather change the timing, nature or documentation of the transactions.

We often run into complicated business models. I like to say they’ve gotten there by design or by default. In either case, the answer to your question is to consult with a qualified business strategist who can help you determine where to consolidate, what to start doing and what should go away.

As a firm, K·Coe Isom can bring a team of specialists in to make a comprehensive appraisal of the purpose of all those different business entities. That’s where the process should start. By questioning the purpose of each entity. If it doesn’t have a clear purpose, it probably doesn’t have a place in the overall structure of your business.

For more information on “cleaning up” your business structures, contact Doug Claussen at doug.claussen@kcoe.com.

Question: When is it advantageous for me to realize a net operating loss in my farming operation?

Answer: With much of agriculture expected to experience a drop in income in 2016, the current situation offers some planning opportunities. The last several years have provided for some of the best years to date for many farmers, which means the increase in deferred income and in the amount of prepaid expenses has typically grown as well. It could be a good time to smooth earnings and recognize some of that income that has been deferred year after year.

Typically it’s best not to create a loss by prepaying and buying additional equipment. It’s better to utilize the lower tax brackets and any itemized deductions or tax credits available to you. If you do find yourself in a loss position, there are some advantages for farmers.

A farming net operating loss (NOL) is eligible to be carried back five years rather than two. If it is more advantageous to carry the NOL two years instead of five, you can elect to forgo the five-year carryback and use the two-year carryback instead. This gives you the opportunity to maximize the benefit of the NOL and increase the amount of cash flow to help offset the loss.

]]>http://fairfarmtax.com/farm-tax-qa-net-operating-loss/feed/0http://fairfarmtax.com/farm-tax-qa-net-operating-loss/Tax Deferral is Sometimes the Best Path to Managing Land Saleshttp://feedproxy.google.com/~r/FarmersForTaxFairnessInTheNews/~3/fFy_N0gcfLU/
http://fairfarmtax.com/tax-deferral-is-sometimes-the-best-path-to-managing-land-sales/#respondSat, 20 Aug 2016 17:46:29 +0000http://fairfarmtax.com/?p=478Read More]]>It can be difficult to avoid taxes on the sale of land altogether, but there are options for minimizing tax exposure now, deferring tax liability until later, and planning for the future.

Recently we worked with a farmer and landowner who was presented with what you might call a once-in-a-lifetime opportunity to sell farm ground. We gave the family options for how to handle the sale, including a 1031 exchange. In a 1031 exchange, the land is sold and no taxes are paid provided the land is converted into another real estate asset.

There are several alternatives to a 1031 exchange, including a deferred sales trust or a structured sale that can result in tax deferral. The family opted for a different approach than a 1031 exchange because they did not want to convert the proceeds from the sale of the land into another land asset.

The sale resulted in taxable income in the millions of dollars, so we gave the family several options for managing the tax exposure. In this case, we gave the family specific scenarios and settled on pre-paying expenses like seed, fertilizer, chemicals and water. These prepaid expenses acted as a buffer against a portion of the proceeds from the sale of the land.

As a result, the family was able to defer a portion of the tax exposure and begin planning for successive years.

There is no one-size-fits-all solution to land sales. Consult your accountant or reach out to me at jeff.tatsumura@kcoe.com to learn more.

]]>http://fairfarmtax.com/tax-deferral-is-sometimes-the-best-path-to-managing-land-sales/feed/0http://fairfarmtax.com/tax-deferral-is-sometimes-the-best-path-to-managing-land-sales/Majority of U.S. House of Representatives Says “No” to Requiring Agriculture to Shift to Accrual Accountinghttp://feedproxy.google.com/~r/FarmersForTaxFairnessInTheNews/~3/swECpwLf7oo/
http://fairfarmtax.com/majority-of-u-s-house-of-representatives-says-no-to-requiring-agriculture-to-shift-to-accrual-accounting/#respondFri, 19 Sep 2014 14:32:24 +0000http://fairfarmtax.com/?p=471Read More]]>A Victory for the Farmers for Tax Fairness Campaign

Farmers for Tax Fairness today praised members of the House of Representatives for their overwhelming support of common sense accounting for America’s farmers and ranchers. Last week, more than half of the legislative body signed a letter to House Leadership expressing support for tax rules that allow certain small businesses, including most farming and ranching operations, to continue to use of the cash basis of accounting. The overwhelming show of support for cash accounting indicates that proposals to restrict the use of cash accounting are unlikely during the remainder of the 113th Congress.

Last week’s letter, which was signed by more than 50 percent of House members, marks a significant victory for the Farmers for Tax Fairness Coalition, a national coalition of agricultural producers brought together by the nation’s most proactive agriculture-industry accounting and consulting firm, K·Coe Isom, LLC.

K·Coe Isom CEO Jeff Wald said the news marked a victory for U.S. agriculture.

“We knew right away that the proposals coming out of Congress would be devastating for our clients and the industry as a whole. The broad base of support for the campaign demonstrated to Congress that the shift to accrual accounting just wasn’t something that made sense for U.S. agriculture. And to Washington’s credit, members of Congress really listened to the groundswell of opposition and told congressional leadership that these proposals just won’t fly.”

In 2013, K·Coe Isom grew concerned about two provisions contained within House and Senate tax reform proposals that would have disallowed the use of cash accounting for any business with more than $10 million in gross revenues. This proposed change threatened common practice in the industry, as most farmers and ranchers have used the flexibility of cash accounting to deal with dramatic shifts in commodity prices, high energy and other input costs, and long pre-productive periods for decades.

The tide began to turn after House Ways and Means Committee Chairman Dave Camp released a new draft tax reform bill in February, 2014. While the new bill maintained the requirement that most businesses with more than $10 million in revenue use cash accounting, the Farmers for Tax Fairness Coalition successfully worked with leaders in the House of Representatives to have farming and ranching businesses exempted from the proposed shift.

Throughout the spring and summer of 2014, Farmers for Tax Fairness continued to educate members of Congress and their staff about the impact of the proposed changes on the U.S. agriculture industry. Farmers for Tax Fairness coordinated its outreach efforts with complementary advocacy from groups such as American Institute of CPAs, the American Bar Association, the American Farm Bureau Federation, and the American Dental Association.

The spring and summer advocacy culminated in letters from 44 U.S. Senators and 233 U.S. Representatives expressing support for the continued use of cash accounting in the agriculture sector.

While comprehensive tax reform legislation is not currently expected to be considered in the remaining months of the 113th Congress, House and Senate leaders have indicated that tax legislation will be a priority when the 114th Congress adjourns in January 2015.

“We believe this sends a strong signal to members of Congress when they begin drafting tax reform next year,” says Wald. “Tax reform is critically important, but it has to be done correctly. Eliminating the use of cash accounting would dramatically increase costs and complexity for U.S. agriculture. Farmers for Tax Fairness, American Farm Bureau, AICPA, and others who helped spearhead this effort really deserve all of our thanks.”

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http://fairfarmtax.com/majority-of-u-s-house-of-representatives-says-no-to-requiring-agriculture-to-shift-to-accrual-accounting/feed/0http://fairfarmtax.com/majority-of-u-s-house-of-representatives-says-no-to-requiring-agriculture-to-shift-to-accrual-accounting/Forty-Six Senators Express Opposition to Mandated Use of Accrual Accountinghttp://feedproxy.google.com/~r/FarmersForTaxFairnessInTheNews/~3/FqzfxIDFkUA/
http://fairfarmtax.com/forty-six-senators-express-opposition-to-mandated-use-of-accrual-accounting/#respondFri, 29 Aug 2014 16:47:14 +0000http://fairfarmtax.com/?p=462Read More]]>On Wednesday, August 6, 46 Senators wrote to Senate Finance Committee Chairman Ron Wyden and Ranking Member Orrin Hatch to express concern about the proposal contained in the Cost Recovery and Accounting Discussion Draft released late last year by former Chairman Max Baucus that would require many businesses to use the accrual method of accounting.

The Farmers for Tax Fairness Coalition (FTF) played a critical role in developing and collecting signatures for the letter. FTF supporters will notice that the language of the letter is somewhat different than past letters we’ve worked on. In this case, FTF made the strategic decision to work with other industries impacted by the proposed shift to accrual—including lawyers, accountants, dentists, investment advisors, architects, and others. As a result, the letter references the detrimental impacts on many industries; not just on farming and ranching businesses.

The Cash Accounting Working Group, as our multi-industry alliance has become known, has proven to be a great asset for the Farmers for Tax Fairness Coalition. The broader group allows us to secure the support of Senators and Members of Congress who primarily represent urban areas or have very little stake in the agriculture industry.

Next Up: Farmers for Tax Fairness and the Cash Accounting Working Group are preparing for another letter, this time to Leadership in the House of Representatives. Stay tuned come early September!

American Farm Bureau Federation President Bob Stallman praised the proposal.

“Farmers and ranchers are grateful for the long-standing willingness of (Committee Chairman Dave Camp), as well as his colleagues, to listen to our concerns on issues like cash accounting.

“We appreciate the chairman’s focus on simplifying and streamlining the tax code. Still, his proposal runs deep and wide and at a level of detail that will require careful analysis,” Stallman concluded.